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Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance by Kevin R. Mirabile

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Measuring Returns and Evaluating Risk

Global macro fund returns, like other strategies, are reported to investors and to commercial databases on a monthly basis. Returns are reported net of all fund expenses, including the fund's management and performance fees paid to the fund manager.

Previous chapters have discussed the various measures used to evaluate performance, risk, drawdown statistics, and descriptive statistics related to fund monthly returns across all strategies. The focus of this chapter is to highlight a handful of measures that potential investors commonly use to evaluate global macro funds.

Monthly return data are used to derive annualized returns, best and worst month, and recent three-month and full-year returns. Table 4.11 shows a typical return profile for an established global macro fund at the beginning of 2012.

Table 4.11 Summary Data for a Single Fund.

Annualized return (%) 7.38
Best monthly return (%) 4.79
Worst monthly return (%) –5.58
2011 Return (%) 3.57
2012 Return (%) 1.37
Return since inception (%) 75.66
Past 3 months (%) 0.59
One-year rolling return (%) 1.63
Two-year rolling return (%) 8.18
Five-year rolling return (%) 29.51

The monthly data reported by a single fund are also used to derive the fund's Sharpe ratio, given a specific risk-free rate, its annualized standard deviation, downside and upside deviation, Sortino ratio, and value at risk under various confidence levels. Other common measures used to evaluate funds include ...

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